¹ A slight enlargement of a paper presented to the Buenos Aires Conference of the International Law Association, August, 1922.

² Although this condition and a varietyof applications of it are familiar to American bankers and their counsel, it seems necessary, for sake of clearness, to advert to the general principle and to modes of assuring respect for it.

³ In this connection, however, another consideration should be heeded. Oftentimes agreements for external bond issues are in fact concluded and perfected in the territory of the state where the lender is located—a circumstance which serves as a warning that no provision of the contract should set at nought any prohibition of the laws of that state denouncing as invalid contracts or provisions of a particular character. It is not suggested that the validity of mortgages or encumbrances of any kind upon immovable property within the state of the borrower is likely to be affected by the statutes of a foreign sovereignty. It is merely sought to be pointed out that in other matters, the state where the agreement ia made may, for reasons of public policy, impose restrictions which if disregarded might prove embarrassing to the lender should the borrower subsequently invoke them as a ground for repudiation or rescission.

⁴ Such is the language of a Bond Trust and Fiscal Agency Agreement between a certain Central American State and bankers of the United States, concluded in 1920.See also Articles VI and X of Chinese Hankow Improvement Loan of September 17,1914, Murray, Mac,Treaties and Agreements xoith and concerning China, Vol.II, p.1172;Google Scholar also Article II of Chinese agreement with Lee, Higginson and Co., of April 7, 1916,ibid., p. 1279.

⁵ A Chinese loan agreement with French bankers, January 21, 1914, for the construction of a railway, purported to pledge by way of guaranty, the Port of Yamchow, its materials and appurtenances.

⁶ The American Commissioners (to whom Prof. John Bassett Moore was Secretary and Counsel) negotiating a treaty of peace with Spain in Paris in 1898, in denying that the socalled Cuban debt previously incurred by the Spanish Government constituted a burden which passed to the successor to the sovereignty of Cuba or to the United States declared: “The debt was contracted by Spain for national purposes, which in some cases were alien and in others actually adverse to the interests of Cuba; that in reality the greater part of it was contracted for the purpose of supporting a Spanish army in Cuba; and that, while the interest on it has been collected by a Spanish bank from the revenues of Cuba, the bonds bear upon their face, even where those revenues are pledged for their payment, the guarantee of the Spanish nation.” (Moore, International Law Digest, I, 367.)

⁷ “No more in the opinion of the Spanish Government, therefore, than in point of law,can it be maintained that that Government's promise to devote to the payment of a certain part of the national debt revenues yet to be raised by taxation in Cuba, constituted in any legal sense a mortgage. The so-called pledge of those revenues constituted, in fact and in law, a pledge of the good faith and ability of Spain to pay to a certain class of her creditors a certain part of her future revenues. They obtained no other security, beyond the guaranty of the 'Spanish Nation,' which was in reality the only thing that gave substance of value to the pledge, or to which they could resort for its performance.” (Memorandum of American Peace Commission, Paris, 1898, Senate Document No. 62, 55 Cong., 3 Sess., Part II,201, Moore, International Law Digest, I, 384).

⁸ In numerous cases the possibility of such a change of sovereignty is so remote as to be purely fanciful. In such instances the lender may obviously dismiss from consideration some of the problems above noted.

⁹ For a singular instance where a railway concession granted by the Spanish Government for a line in the island of Luzon, was regarded by the Attorney General of the United States as not wholly beneficial to the territory traversed, see opinion of Mr.Griggs, , July 26,1900 Google Scholar, 23 Op. Attys. Gen. 181. Chinese loans of the past decade have commonly adverted to the purposes thereof in the original agreements. Possibly at times the professed designs have disguised the actual aim of the borrower. See Willoughby, W. W.,Foreign Bights and Interests in China,Baltimore,1920,509-510 Google Scholar. A Chinese loan agreement of May 13, 1916, with the American International Corporation,adverted in the preamble to the works of great humanitarian benefit to be undertaken by the borrower, which in this case embraced a canal improvement. See Murray, Mac,Treaties and Agreements with and concerning China, II, 1304.Google Scholar

¹⁰ The contentions of the United States in the negotiation of a treaty of peace with Spain in 1898 would hardly encourage a different view.

¹¹ Thus Article XXIV of the treaty between the United States and Panama of November18, 1903, declares: “No change either in the Government or in the laws and treaties of the Republic of Panama shall, without the consent of the United States, affect any right of the United States under the present convention, or under any treaty stipulation between the twc countries that now exist or may hereafter exist touching the subject matter of this convention. “If the Republic of Panama shall hereafter enter as a constituent into any other Government or into any union or confederation of states, so as to merge her sovereignty or independence in such Government, union or confederation, the rights of the United States under this convention shall not be in any respect lessened or impaired.” (Malloy's Treaties, II,1356.)

¹² Whether such an undertaking would be valid, should engage the attention of counsel as a problem incidental to that of ascertaining the scope of the powers of the borrower.

¹³ An interesting instance of an arrangement substantially on such lines is seen in a certain colonial bond agreement of January, 1922.

¹⁴ “The loan represented by the proposed bonds shall constitute and is hereby declared to be a direct liability and obligation of the Republic irrespective of any security provided hereunder.” (Section I (12) of a certain Bond Trust and Fiscal Agency Agreement of 1920.)See also Article II of proposed loan agreement of 1911, between the Republic of Honduras and Guaranty Trust Company of New York as fiscal agent.

¹⁵ It may be, however, that the lender is willing to proceed on a different theory and content that service should be effected primarily out of income derivable from the security,and secondarily from the general revenues of the borrower

¹⁶ Such monopolies have been so utilized by both Japan and China.

¹⁷ See Memorandum of American Peace Commission, at Paris, November 21,1898, Moore,International Law Digest, I, 381, 384.

¹⁸ See United States Foreign Relations, 1912, pp. 555, 556, 559, 591.

¹⁹ See, for example, the Manifesto of the National Congress to the Honduran People, signed by most of the deputies February 14, 1911, giving reasons for the action of the Congress of Honduras in disapproving the convention with the United States, signed January 10 of that year. United States Foreign Relations, 1912, p. 577.

²⁰ Much less difficulty presents itself where the property pledged and relinquished to the possession of the lender or a trustee assumes the form of bonds or of shares of stock duly transferred to it, with a full power of disposition in case of default, and without necessitating further action by the borrower in that event. When the asset sought to be hypothecated consists of immovable property it is highly desirable and may, in the particular case, prove of utmost importance to place the pledgee in no less favorable a position.

²¹ This was effectively accomplished by the terms of a certain agreement negotiated in 1920, between an American state and the lending banks.

²² It may be observed that while no consideration can ever outweigh the value of a safeguard essential to the protection of the lender at all times during the life of the loan, an unnecessary precaution which roughly ignores the feelings of the borrower and is contemptuous of its pride is not likely to prove beneficial to the transaction or really advantageous to the lender.

²³ Instances are numerous.

²⁴ This was true in the case of a proposed loan to Honduras in 1911.

²⁵ See, for example, Text of China Consortium Agreement of October 15,1920, this JOURNAL,January, 1922, Vol. 16, p. 4. See also note of Secretary Hughes to Messrs. J. P. Morgan and Company, March 23, 1921, declaring that the principle of cooperative effort for the assistance of China, through the operations of the Consortium, had the approval of the Government. Pamphlet No. 40, Division of International Law, Carnegie Endowment for International Peace, p. 74.

²⁶ See Department of State, Statement for the Press on Flotation of Foreign Loans,March 3,1922. In this statement it was declared: "but it should be carefully noted that the absence of a statement from the Department, even though the Department may have been fully informed, does not indicate either acquiescence or objection. “The Department of State can not, of course, require American Bankers to consult it.It will not pass upon the merits of foreign loans as business propositions, nor assume any responsibility whatever in connection with loan transactions. Offers for foreign loans should not, therefore, state or imply that they are contingent upon an expression from the Department of State regarding them, nor should any prospectus or contract refer to the attitude of this Government.”